Credit Rating Agencies Under Fire

None of the “Big Three” – Standard and Poor’s, Moody’s or Fitch – gave even a hint of warning of the great financial collapse of 2008.

All three gave companies “AAA” ratings right up until days before each institution went down in flames.

It’s bad enough that rating agencies have a vested interest in rating their customer’s credit as high as possible.

To lower a customer’s credit rating is akin to biting the hand that feeds you. All three agencies get paid huge sums of money for those capital “A”s.

After getting burned in 2008, the rating agencies tried to change their ways and be a little more accurate in their assessments.

So what happens to the bearer of bad news? Yup! That’s right. They shoot the messenger!

The Great Debt Ceiling Debate of 2011

Last August the S&P downgraded the U.S. government’s credit rating for the first time ever. That came in the wake of Congress’s shameful inability to deal with long-term debt during the debt ceiling debate. Remember that debacle?

So what happened when S&P did that? Yup! Shoot the messenger! S&P and all the credit agencies were roundly criticized and there was talk of reforming them.

Yeah, right!… as if it’s the credit agency’s fault for Congress’s failure to face its ginormous $15.7 trillion debt and $450 billion yearly interest payments!

The Newest Credit Rating Assault

On Monday Moody’s downgraded 26 Italian financial institution’s credit ratings. So what happens again? Yup, they shoot the messenger!

The latest mugging of the credit agencies came this week:
Bankers plan to foil rating agencies
– Patrick Jenkins, Banking editor, Financial Times, 5/15/2012

This time up to 20 European banks are out to get the “Big Three” at a private finance director’s meeting in Frankfurt. It was held yesterday. No news on the outcome yet.

Bottom line…
The bank finance directors want to change the rules. They want to create new, friendlier credit rating agencies from which they they can pick one to rate their bank’s credit higher. That makes it easier to hid their debt exposures.

Conclusions

The whole idea of having credit rating agencies in the first place is to have an outside auditor validate the credit worthiness of a financial institution so that depositors and users can have confidence when dealing with them.

Apparently, as long as they didn’t do their job very well before 2009 they were OK. But ever since the “Big Three” started rating more accurately they have been under fire from every quarter.

China, for example, has moved to replace existing ones with its own agencies because they don’t like how they have been rated.

If countries and financial institutions are going to change the rules to maintain artificially high credit ratings then we might as well not have credit rating agencies in the first place.

But we need them for both citizen and business protection.

Ordinary consumers of financial services should rise up and demand that credibility be maintained in the process of credit ratings… not diluted into irrelevancy like the world’s money-changers wanna do.

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About azleader

Learning to see life more clearly... one image at a time!

Posted on May 16, 2012, in Business, Credit Downgrade, culture, Debt, economics, Life, news, Opinion, Politics, Thoughts. Bookmark the permalink. 4 Comments.

  1. I don’t know what the answer is, AZ, but the problem is serious. I spent a lot of years in the corporate world and I know how cozy things get between the companies and the auditors and I assume it is the same with credit rating agencies.It would be nice if they all belonged to a clearing house where companies would request an audit or a credit rating and the clearing house would select at random the agenciy to do the job.

    • Every time someone gets downgraded all I ever see in the news is the rating companies are flawed.

      One thing certain… as long as governments threaten them and lobbyists lobby against them the situation won’t improve… not that it matters all that much anyway. 😉

  2. Credit rating companies should be able to give out fair and accurate ratings without fear of reprisal or punishment.

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